Politics & Policy

Fund Children’s Health, and Harmonize Its Block Grants with Medicaid

(Photo: Dreamstime)
Families are often torn between Obamacare exchanges and the Children’s Health Insurance Program, which fit together poorly.

Senate leaders recently reached agreement on a five-year extension of funding for the Children’s Health Insurance Program (CHIP), which was due to expire on September 30. CHIP, which helps states provide health-care coverage to low-income kids, is better structured than Medicaid to ensure that funds are targeted to those who need assistance most. Now, after the Affordable Care Act has created an entitlement to subsidized coverage through the exchange, CHIP-eligible families are often torn between two programs that fit together poorly. If a few minor flaws in its design are fixed, however, CHIP can fill a gap and enhance the rest of America’s health-care safety net.

Between 1982 and 1990, Congress expanded eligibility for Medicaid seven times through bipartisan federal budget agreements, increasing spending on the program from $32 billion to $72 billion per year. Republicans grew weary of the structure of the program, which rewarded states with the loosest cost controls and distributed the largest portion of funds to the wealthiest states rather than to those with the greatest unmet health-care needs. In 1997, when Senator Ted Kennedy (D., Mass.) sought a further expansion of federal assistance to provide health insurance to low-income children, Senator Orrin Hatch (R., Utah) insisted that it be distributed though a newly designed program.

The product of their agreement was CHIP, which provides funds for states to extend health-care benefits to children in families whose income is just above the levels required for Medicaid eligibility (at least 138 percent of the poverty level for those under age six, and at least 100 percent of the poverty level for those ages 6–18). The federal government bears more of the cost of CHIP (92 percent in 2016) than of Medicaid (63 percent), but the allotment that each state can receive is capped over a two-year period, after which any remaining funds are redistributed to the other states. A supplemental contingency fund is available for states that show high enrollment growth and exceed their caps.

In return for greater federal control over the total amount of money granted to each state, states have been allowed more freedom over how to spend it. They can set eligibility criteria in terms of income and age, extend coverage to parents and caretakers, and require waiting periods to ensure that those who need coverage most are likeliest to enroll. States must provide a benchmark package of benefits, which includes hospital and physician care, drugs, diagnostics, dentistry, and mental-health services, but they have broad freedom to set premiums and to require out-of-pocket payments.

To ensure that federal assistance would be distributed in proportion to needs, CHIP’s allotments to states were initially based on the number of children in low-income households and the number of uninsured children living in each state. However, that inadvertently punished states for concentrating CHIP funds to cover children who lacked insurance. Between 1997 and 2015, after 8.4 million had been enrolled in CHIP, the proportion of children in families earning 100 to 200 percent of the federal poverty level who were uninsured fell by 16 percentage points, while the proportion enrolled in private insurance was reduced by 25 points.

Loose rules also allowed states to disregard a substantial portion of beneficiary incomes in eligibility assessments. Some states stretched eligibility to include higher-income groups who were disproportionately likely to have private insurance already. While the median state eligibility ceiling is 255 percent of the poverty level, New York has disregarded such a large portion of income in its eligibility assessment that it was able to push eligibility for the program up to 405 percent of the poverty level ($82,701 for a family of three).

If a few minor flaws in its design are fixed, the Children’s Health Insurance Program can fill a gap and enhance the rest of America’s health-care safety net.

The ACA replaced that incentive structure, basing each state’s allotment on the level it had received in previous years. That locked in the funding advantages of states that had most abused the system, and it altogether eliminated the mechanism that was designed to distribute funds in proportion to the unmet health-care needs of low-income children.

CHIP fits awkwardly into the ACA health-insurance landscape, where most of those who are eligible for CHIP benefits are now entitled to subsidies through the exchange. It was reasonable to have a program dedicated for kids when there were no subsidies for their parents, but the existence of CHIP alongside the exchange could increase the costs borne by low-income families: Because a subsidized exchange premium is capped at a fixed percentage of a household’s income, the separate provision of coverage to children through CHIP would force the household to bear an additional premium without diminishing what they owe for coverage through the exchange, or without greatly increasing the amount of care to which they are entitled. Nonetheless, CHIP also serves as a band-aid for the ACA’s “family glitch,” whereby children lose eligibility for subsidies through the exchange if their parents are offered employer-sponsored coverage — even if that coverage fails to include them.

CHIP’s funding structure is well designed to encourage states to make the most efficient use of federal funds in filling the most essential unmet health-care needs. In this, CHIP performs far better than Medicaid, and it addresses the problem of enrollment-driven cost growth, which even the GOP’s recent proposed reforms left unresolved.

Because CHIP’s cost is under control, the program is trusted. It has always enjoyed broad bipartisan support, but its mission now seems confused. Although CHIP may appear to be awkwardly layered on America’s fragmented health-care safety net, its fluid structure makes it well suited to fill gaps in coverage and redress disparities between states. CHIP would best fulfill that mission if its funds were allocated across states in inverse proportion to the level of federal Medicaid assistance that each receives per low-income child. That would raise the floor of federal assistance to states and ensure that funds would be flexibly directed where they would fill the most unmet needs, while discouraging attempts by the wealthiest states to claim more of their fair share of Medicaid funds.


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